http://online.wsj.com/article/SB1150851036...s_editors_picks


It's time to put our house in order -- and maybe the garage, too.

The U.S. savings rate has fallen sharply since the mid-1980s. In fact, last year, it was negative for the first time since 1933.

At first blush, this collapse in the savings rate seems puzzling. Our incomes have climbed at a healthy clip over the years, easily outstripping growth in spending on key items like food and clothing.

So why do we find it so tough to save? We can't, it seems, blame it all on morning lattes and evenings out. Instead, the big culprits are our two largest expenses: The roof over our head and the cars in our driveway.

• Signs of struggle. Some pundits have argued that the savings rate isn't as low as the official statistics suggest, or that Americans don't need to save so much because they are wealthier than ever. But when I look around, I see plenty of signs of financial distress.


A study sponsored by Putnam Investments estimates that seven million retirees have chosen or felt compelled to return to work. A Pew Research Center survey discovered that 20% of baby boomers had provided financial help to a parent within the past year. Families are also finding it tougher to pay for college, with College Board data showing a 194% increase in annual borrowing through college loans over the past decade.


All this suggests folks are struggling to make ends meet. But why? Consider a new study from the U.S. Department of Labor titled "100 Years of U.S. Consumer Spending." The study draws on the Bureau of Labor Statistics' consumer expenditure survey.

It might seem like Americans spend too much on clothes, eating out and entertainment. In reality, however, the portion of our spending that's devoted to food and apparel has fallen sharply over the past century.

Tobacco and booze also account for a shrinking share of spending. Meanwhile, the slice of our budget that goes to entertainment and health care isn't much changed from 40 or 50 years ago. Indeed, if you look at all these categories, you might imagine families have ample financial room for maneuver.

• Road to ruin. Yet we struggle to save -- and the blame seems to lie with two other expenses, transportation and housing.


Our transportation spending jumped sharply in the 1960s and has remained high ever since, accounting for more than 19% of spending in 2002-03. It's easy to see why: The number of passenger vehicles has leapt 270% since 1960, far ahead of the 86% increase in the adult population. We now have one car, van, pickup truck or sport-utility vehicle for every adult.

"The automobile is no longer a luxury item," says Michael Dolfman, the Bureau of Labor Statistics' regional commissioner in New York and co-author of the new BLS study. "Cars became a necessity to get to work," with working couples often needing two cars.

Meanwhile, housing expenditures have climbed fairly steadily over the past century, and our homes now claim a third of our spending.

More families are buying houses, more folks are purchasing second homes, and houses are getting bigger. According to the Census Bureau, over the past 25 years, the number of second homes has jumped 95% and the size of the typical newly constructed single-family home has ballooned 40%.

• Saving ourselves. Put it together, and houses and transportation accounted for 52% of all expenditures in 2002-03, up from less than 41% in 1950.


You probably need to have a car, and you've clearly got to live somewhere. Still, it strikes me that housing and transport expenses are ripe for cutting, if only because they are such plump targets.

But how are you going to cut back? Consider this: We may be spending more on cars and homes, but we are also purchasing cars and homes that are far more luxurious.

"The trend has been to buy the most house you can afford, rather than the amount you need," notes Sophie Beckmann, a financial-planning specialist at A.G. Edwards in St. Louis. "It's the same thing with cars. You see a lot more luxury cars on the road. While you can get by with a $20,000 car, people buy the $40,000 SUV with the leather seats and the TV. There's a lot there that's discretionary."

Indeed, if you're willing to skip the heated car seats and the third bathroom, you would probably still be living better than your parents did -- and you will free up money that can be saved.

This suggestion may puzzle some readers. Sure, cars might be money losers. But houses appreciate over time, so shouldn't you buy the largest home possible?

That might have been true during the recent housing boom -- but it isn't likely to be true over the long run. Since 1975, home-price appreciation has been modest, averaging just two percentage points a year above inflation.

Admittedly, you could goose your home's return with the leverage from a mortgage. You also, however, have to factor in the mortgage's cost, plus all the other expenses of homeownership, including maintenance, property taxes and insurance. The bottom line: Once you deduct those costs, you could probably amass far more wealth by purchasing a smaller home and then sinking the extra money into your 401(k) plan.

maybe the low returns on savings matters too?>???

Does the word "savings" also include investments in stocks, bonds, and commodities? Or does it only include savings accounts and Cd's in banks? I don't have much of a savings account but I have a lot of savings in mutual funds...so I can get a good return.

I believe that savings means any money not spent - whether that is in mutual funds, cd's, a bank account, whatever ...

There are so many things that have to be taken into consideration when asking this. I have thought about this over and over and I know it has a lot to do with advancements in technology, rising cost of living versus salaries, more single parents, more single women, more single men, cost of education, etc. Although, I do agree with the article that we tend to waste a lot of money, there are plenty of other reasons as well.

Low returns? The stock market has historicallly provided a better investment than a house ever will.

savings not investments. what is the average SAVINGS APY???

and where did I say anything about a HOUsE?????

(BTW we've had 105% appreciation in 4 years on our home, my stocks have not done that well).

Savings ARE Investments. Investments are Savings. ToMAYtoes...ToMAHtoes...

The methodology used to calculate "savings rate" is fairly flawed. The Feds have screwed with this calculation over the decades to advance certain political causes, it isn't terribly accurate.

They do NOT actually look at what is saved.
They look at income (and not income from all sources) and from that, subtract spending. They assume that any money left over is "savings" and any deficiency is negative savings.

Problem #1 is that not all income is considered. Certain types of investment income are excluded among other things.

Problem #2 is that large purchases are fully subtracted from income in the year the purchase was made.
If your salary is $100K/year and you purchased a 125K home, you are -25K for that year with that purchase alone. In reality that's not the way it works. Sure does whack the averages though, particularly when home sales hit record highs.

Problem #3 is that certain types of investments are counted as "expenses/purchases" instead of investment or saving.

There are more, but those are the ones that come to mind right away.

If you do the math the right way- the savings rate is still embarrasingly low- but if I'm remembering right it isn't negative either.

That's interesting information radi8. I should have known you'd have the skinny. (yes, that IS shameless sucking up to one of the bosses)

I still wonder how many people are actually putting money aside - whether in a 401k or 403b, or a bank account, or any kind of investment, really. I would think that if one is looking for some kind of return, a bond would be okay. I'm not sure, but I do know that I have had the *#$( kicked out of me in the past for not having savings. I am really trying to get past that.

start small. It will add up fast.

Actually,

The two should not be considered the same! The big difference is time and application.

Savings - Setting aside funds from a current income source to achieve small to medium term savings goals. Saving is a "short term parking spot" for your cash. (setting aside money to pay cash for a Plasma T.V or building up an emergency fund of 3 months' expenses would be an example of saving)

Investments - Set aside funds for potential growth for FUTURE income and Considerable Net Worth. Investments are "long term parking spots" for the hopes of replacing your current income source in the future. Investments are also typically not as liquid as a savings product would be, thus possibly assisting in higher returns.

You won't hear too many people call in to a financial advisor and tell him/her that they are ready to retire off their retirement funds resting in savings accounts!


BTW.... I totally agree with Hegemony..

Real Estate... not just termed as a house... has way out trumped Stocks!! Personally my family has made significant ROI's of 400% in a 6 month time period by flipping real estate! However, stocks did make a significiant contribution in providing the opportunity for real esate investing!

http://www.financialservicesfacts.org/fina...e_sort_657220=2

That'll give you a rough idea what % own mutual funds and have other types of savings and investments.


For example, families that own one or more mutual funds:

I consider my investments as savings.

As for the house thing, while YOU may have made money flipping houses (and I am not denying people have done it), there are many people who have tried who have not been able to do it and then they are stuck with two mortgages.

If your house appreciates at a rate of 4% per year, and you can make 12 to 20 % in the stock market, then yes, housing is not the best investment out there (as many people are led to believe).

It beats renting but is not necessarily the best investment. Which is the point I was trying to make.

I think not only do people buy more house than they need, but builders don't make starter homes anymore, especially where I live. I don't know why they consider 2600 sq. ft. house a "starter." All the smaller homes are being snapped up like crazy and over-valued as well.

4 OF THE MANY REASONS PEOPLE DON'T SAVE MORE MONEY

1) INTEREST IS TAXABLE INCOME

2) YEARS AGO THE FIRST $200 WAS NOT TAXED

3) LIVING PAYCHECK TO PAYCHECK

4) THE APR YOU GET IS A JOKE

WHAT EMERGENCY IS ONLY PAYABLE WITH CASH???

(other than DRUGS)

While the government calculation of savings may be afulty, there have been other stories about retirement planning that are pretty hair-raising. Over half of people who respond to polls say they're confident they'll have enough money during retirement. And fewer than half of people 50 and over have more than $50K saved. My amateur opinions about why people are spending more than they make, or close to it:

1. More goods and services that people consider part of a "normal" life. New clothes every year, a closet full of shoes, new cars that cost a bigger multiple of the average salary than they used to, cable TV, cell phones, frequent meals at fast-food places. A bedroom for each kid and a car for each teenager with a license. People just didn't spend like that 30 years ago. Now it seems normal.

2. An increasing reliance on "the government". Guess where "the government" gets its money.

3. Student loans weighing down your early years.

4. Ignorance of compound interest- the idea that you can wait to save for retirement till you're in your 50s.

5. The assumption that you'll get a nice pension from the job. Those are few and far between.

No matter what rate % rate of return you get, why are people so opposed to putting money away for a rainy day?

It is baffling to me that some are equating saving money as wasting it, because they can get better returns elsewhere.

My husband and I learned this lesson, and reinforced my views the first time his pay got screwed up, and he didn't receive a paycheck. Thank GOD we had the equivalent of one month of his pay in a savings account. It paid for itself right there, and we were able to pay our bills WITHOUT BORROWING more money.

I think you're exactly right on all 5 points. The number of people who have inadequate retirement funds is staggering.
I think there is a faulty belief that SS and medicare will be sufficient and what's still needed can be funded by working a couple part time hours weekly if necessary.
In fact the "benefits analysis" thing I get yearly from the SS administration paints a fairly comfortable picture- according to that I will receive about 70% of my current income in SS benefits alone after retirement. Problem is, that's today's dollars 25 years in the future- inflation will reduce that benefit to considerably less...assuming it's still around and unaltered.

In agreement with the statement about SS...my current gf's grandparents are about to move in with their daughter and son-in-law because they can't afford to continue renting the house they live in. Their rental payment is cheap, they live alone, food and utilities are basically their only expenses and they have no spare cash. They didn't put money into any retirement and now they are suffering under increasing medical bills, forcing them to move in with their daughter.

I think many people have gone old school with savings and keep a chunk of cash in the house.

I don't consider SS into my equation of retirement....because its just extra change....not enough to even consider IMHO.. not enought to live on.....Its kinda ashame of all the money you put into it....you get very little return...and those that dont put into it....can receive its benefits....I don't understand....maybe that should be discussed over on PF...

I wouldnt go that far....I would keep it in savings or somewhere else that can be accessed easily.....Starting to think the old school of way is better then the new....and I am not old...I dont think I am at least..

considering I won't get SS (because I do not pay in) I also think SS is an illusion for a lot of people. Saving for your own retirement (and starting that savings early) is the only way to ensure some level of living in retirement.

Ditto for me. I'm 29 and just assume I won't get anything by the time I'm eligible, and I plan accordingly. I'm not quite up to maxing out both my 401k and a Roth, but I'm pretty close. The money comes out before I get my check, so I've never had it to miss.

I guess that's what I don't understand either. I don't have much in savings right now, and I have determined not to have to turn to my parents for help in the future. But I'm working on paying off all of my bills, including money I borrowed from them eons ago, and then I'll really get serious about putting money back. I still contribute to my 401k, and no, I'm not maxing that out. I likely never will, being single and raising kids alone. But I think my retirement will be okay based on what I'm putting back for that purpose.

I am just terrified of being in a position again of needing money and not having it available. So while everyone else can continue to think that the sky will fall because money sits in a savings account drawing 4% or so (I keep my savings in HSBC), I'll take comfort in knowing that if I need it, it's easily accessible.

Well said!

I have 401K, Roth, and liquid savings.... 2 different purposes, but like TX, I want some of it available right away if I need it.

And that is all that really matters. Not everybody can take that same level of comfort. So good for you.

Your same scenerio is a little like what my wife and I are seeing with my Mother-in-law. She lives in her daughter's house and pays half the bills, but doesn't even have a penny to her name after paying her monthly expenses. She had lost her job about 3 months ago and unemployment doesn't really cover anything for her. My wife and I have been helping her out with as much as we can each month, but that really takes away from any extra investing that we would be doing!

In-turn, if your parents weren't good savers in their early years, then they end up becoming partially dependant on their children which in-turn takes away from the children's potential savings and retirement abilities!

It sure would help if we could get the ol' Revenue Service to allow deductable contributions to our senior citizens that do not have any retirement funds to stand on since we all know SS is dwindling down to zilch!

In my case, I’ve chosen to put every penny I can into my 401K. Unfortunately I am unable to max it out, after all I do have to have a place to sleep and I still enjoy eating. I have 10 years until I retire so in my humble opinion this is the best thing I can do. The problem with all this speculation is no matter how much I can save, no matter how much SS I will receive, what will it be worth in 2016 or later?

You are doing a fantastic job while raising children on your own! I have much respect for those single mothers as I was raised by one myself and married one!

But.... on the savings approach! I teach several classes at the homeless shelter her in San Antonio and one class dives into savings vs. investments.

I know that everyone has their own opinion and there are so many financial advisors all preaching to a different tune, but my opinion mirrors most of what Robert Kiyosaki thought processes describe.

As an investor you want to become a Qualified Investor! Someone that has the knowledge and experience to really do start building up to the big deals! You should not just dive right into the ocean if you don't already know how to swim!

Becoming a Qualified investor is mosly like building houses. You MUST build a strong foundation first and get a structured frame work (blue-print) before you start putting things together.

Savings is exactly that: The stong foundation As a saver, you should put aside enough money to build up an emergency fund of 3 - 4 months expenses. Once this is done, foundation is basically complete and now it's time to start building up the frame work and house. (Investing). You pick a more risky investment product than a basic fully secured product (savings, money market, CD), but also more secure than stocks and other higher risk investments. Plan out an amount you would like to build up to.......and get there!

As you continue to invest into building up that desired amount... once you get there... STOP! Time for the next investment product or next "house" as I call it. Then..... now you are ready for a higher risk investment than the one before with the potential for higher returns.....

Throughougt this entire process, the savings aspect should not stop, but slowly be put aside for other desires or needs throughout the investment building process.

Eventually after you've build a couple "houses"... now you've got secured liquid funds, small growth investments and higher growth investments... and the fact that you were setting goals, getting there and then moving on to new ones is what makes the cycle fun and worth keeping to the plan!


Growth pattern process example: (Blue-print)

1.Savings to 3 month emergency fund: $8,000 - took 12 months to save up.
2. Investment building: $8,000 small growth mutual funds - took 14 months to save up (still putting some into savings along the way)
3. Investment improvement: $8,000 medium risk bond, or stocks - took another 14 months
4. Investment acceleration: $8,000 high risk IPO's or aggressive MFs.

Obviously this is just example and I didn't put much planning into this example (I wouldn't give out my personal plan... don't want anyone stealing it and then blaming me cause it's not working for them! LOL)

In conclusion, that is how I seperate the two ideas as I think it's most helpful to understand the definition of both!

I've only got $250 in savings so far. Well, not counting my BofA savings. There's another $200...I was gonna transfer $150 of that to the ING...But fi is taking a class this coming weekend to become a commissioned security guard and that costs $150 and his employer ain't paying for it.

But even if he doesn't get a raise at his current place of employment, he can start looking for other jobs...IIRC, he said back when he was looking, places like Loomis & Fargo and/or Brinks Security were paying like $13-14/hr for commissioned security guards...That's a LOT more than he makes currently.

cljohnr,

I completely agree with you. My parents told me growing up to max out retirement accounts and learn to live with what’s left. I don’t consider Social Security or the small pension Lockheed will give me in retirement when making my retirement plans. It’s up to each individual to plan for his/her (& there families) future. Don’t count on anyone else.

One more thought on this- easy credit. In 1979 I was turned down for an American Express card. My sin was that I'd had a $90-day late on a $50 charge at a department store. (I moved, didn't get the bill, tried to call and tell someone, got the runaround, gave up, and they reported it. When I finally got the %$#! bill I paid it in full.) The rest of my record was clean. There were a lot of state laws that capped credit card interest rates at about 12%, so banks were really picky.

In some ways it's positive that more people who need credit can get it, but it also means you can have everything you want RIGHT NOW. Just hand over the plastic. So, instead of saving to get something, or buying it on layaway (what a quaint notion- does anyone do that anymore?), you get it now and pay the cost, plus another 50-100% of the cost in interest when you pay it off over 3 to 5 years. That's money that could go into savings and investments, but people are chained to credit card debts.

I'm not in the "credit cards are evil" camp- I'm happily racking up hotel points on mine and paying in full every month- but I do think they're another reason people aren't saving anything.

I was thinking about this on the way in this morning. I wonder if some of the "zero down" mortgages have anything to do with this? Because it hasn't been that long ago that one needed a substantial down payment to buy a house.

I think the "incentives" to save are not as obvious as they once were. As Athena pointed out, "easy credit" means people don't have to wait to buy anything. I think my parents had a Sears charge card, maybe a Foley's card, a Shell card, and perhaps one other one when I was young. Now I bet they easily have 20 cards. They are in the "saver" camp ... they believe in putting money away, but they have credit coming out of their ears. Of course they are now in their 60s ... but for someone who's in their 20s ... what incentive do they have to save?

As others have said, why save when you don't need to? Just buy it on credit. Few people pay cash for cars these days, financing cars has become the "norm".

a car is not a smart thing to finance, imo. Then you are throwing interest payments ON TOP of the depreciation that comes with a car.

Houses I can see financing because the average person doesn't have the cash sitting around to buy a house and won't have even if they save for 5 or 10 years. Plus the interest on a house is tax deductible and houses (normally) increase in value.

Not if your rate is 0%.

I also disagree if you tend to hang on to vehicles for a long time. I have traded in two vehicles that I was upside down on ... one was a van that I bought with my ex - I just wanted to get rid of it because it represented a lie to me. I wasn't rational at that point in my life about much of anything, so I didn't really care if I rolled over a huge chunk of change ... I just wanted away from the #*!(#%$*# and I didn't want anything other than my kids to remind me of him. The second vehicle was the one that I bought when I rolled over on the van ... technically I was upside down only by what I had rolled over from the previous vehicle.

Anyway, I don't usually do that ... I typically buy a new vehicle then drive the wheels off of it ... I had a 1990 Ford Tempo that had 198k miles when I finally dumped it in 1998.

There was another thread here where someone was talking about investing 3k to fix up his car or to buy another car ... and by and large folks were advising him to fix up the old car. Sorry, but I think if you have a car that's worth no more than $1k and you put $3k into it ... I don't find that a wise money decision either. What if the car is totalled in an accident? You're not going to get that money back ... you're screwed. I would rather take the 3k and put it toward a down payment on a car that costs about 17k (the cost of the vehicles the other poster was considering) and have something new that at least you can recover SOME of the money should it be totalled. But I guess it's all in the way a person was raised. My dad always taught me to never invest more than the worth of a vehicle ...

Come to think of it, he's bought new vehicles for ... I dunno ... 20 years? Never once has he gone in the hole, even when trading them off every two years. I guess you just have to know what you're doing huh?


ETA: Gap insurance on a new car is a very good thing too ... should the car be totalled, the gap insurance will cover it. And IIRC, it only cost me $300 to buy it. Money well spent, IMHO.

It's quite simple....... Look at the finance terms and ask "when to finance or not to finance?" That is the question...

** to finance something that is going to appreciate or bring you a higher return than your fiance rate is good!!

** to finance something that is going to depreciate or going to bring you a lower return than your finance rate is bad!

Another quick question for you all.......

If your credit card gives you a 0% APR for the life of the balance and it also applies to cash advance checks, and you already know that your monthly payments would be very manageable.....

.............. then should you take out a large chunk of money and put it into a 5.03% APY Money Market?

What do you think about it?

only if you can afford to make the monthly min payments every month until the CD matures or Money Market shows a profit

Are there cards that give 0% for the life of the balance? I've only seen 0% for 12 months, of 1.99-3.99% for the life of the balance.

However, the theory still works. I don't see anything wrong with holding debt at one rate if the money is earning a higher rate.
I will only do this under the condition that I have the money available somewhere to pay off the entire amount at any point. For example, right now I have one CC balance of $1200, at 0% for about 4 more months. I have the full $1200 sitting in a savings account and could pay off the card at any time. I can comfortably make the minimum payments out of my normal income, but I still wouldn't be comfortable having that debt if I wasn't able to pay it off at any time.

Everyone has to judge their own risk level, though.

Actually, I mentioned above 0% APR for life, but it is actually 1% through Citibank Platinum AAdvantage. I took advantage of the opportunity about a year ago and it has really paid off tremendously.

I also have a MBNA at 0% til 07/2007 that I have done the same thing with my credit limit and it has really built up quite a nice MM account for me...

I have made all payments like clockwork as they are on auto pay, and in one full year alone I have a net earning of $740.00.

At any time I could liquidate my MM and pay off both accounts easily and have pure interest still there making me more money... this is what I call fun!! Compounding interest is truly the 8th wonder of the world....

I'm playing the CC at their own game!! That's how you can make it work!

Of course it is a wise financial decision. The worth of the car is irrelevant. The car is not an investment, it is a liability. I would MUCH rather put 3K into a car that is only worth 1K, (I'm only out 2K if it gets totaled), than buy a NEW car that will lose 9K in two years, then I'm out 9K. And I understand gap insurance, but STILL you're locking yourself into a monthly payment, a much higher insurance premium (you only need liability on a car worth 1K).

FINANCIALLY SPEAKING, the 1K car is the better choice because it REDUCES your liabilities. A 17K car increases your liabilities.

And besides, an insurance company will total a car worth 1K if 4 body panels get damaged, that doesn't mean your out 1K, it just means you have to spend 1K to get the body panels fixed. You don't buy full coverage on a car worth 1K anyway, so who cares what the insurance company thinks.

sometimes the reason to buy a new car is not strickly financial. side air bags? stability control?

see:

http://biz.yahoo.com/cnnm/060613/060906_iihs_esc.html?.v=4

I agree with you. Sometimes it's also just an emotional decision. All of those reasons are perfectly fine for buying a new car. BUT, none of those reasons can erase the fact it is not a good FINANCIAL decision.

I'm purely speaking financially here. I would love to own a brand new Porsche for example. If I could afford one, I would care less about the depreciation (I probably wouldn't care about the safety features either to be honest with you ).

I'm just trying to help those who are here with financial questions. I've learned a lot from here and I'm trying to pay something back.

I don;t think financing a car is that bad as long as the term is no longer than 36 months.

new versus used is a personal choice. I would not buy any used car built after 1969.

Heh. One day we are going classic-car shopping, Hege. I suspect we will be buying the same things.

The last car I bought was used. It had a list price of $28,000. The car rental folks drove it until it had 26,000 miles on it. I bought it at $12,900 and got 6.10% financing. My point is they drove the car for one year and it depreciated right at $15,000, I'll drive it for 5 years and still have a car worth selling. I think I did ok on a used car.......and it's later than a 1969 model...the year I graduated from high school.